In: Finance
PRESTON PRINTING is considering a four-year project to improve its production efficiency. Buying a new press for $535,000 is estimated to result in $219,000 in annual pretax cost savings. The press falls in the MACRS 5-year class, and it will have a salvage value at the end of the project of $89,000. The MACRS rates are 0.2, 0.32, 0.192, 0.1152, 0.1152, and 0.0576 for Years 1 to 6, respectively. The press also requires an incremental $4,600 in inventory for each of the four years of the project. It must also invest $24,000 at the outset for spare parts inventory. Both types of inventory will return to zero when the project ends. The shop's tax rate is 23 percent and its discount rate is 15 percent. Which of the following values is closes to the NPV of the project?
Ref | Particulars | Year 1 | Year 2 | Year 3 | Year 4 | |
a | Operating cash flow | $ 219,000.00 | $ 219,000.00 | $ 219,000.00 | $ 219,000.00 | |
Loss on sale of asset | $ (3,448.00) | |||||
b | Depreciation | $ (107,000.00) | $ (171,200.00) | $ (102,720.00) | $ (61,632.00) | |
c=a-b | Profit before tax | $ 112,000.00 | $ 47,800.00 | $ 116,280.00 | $ 153,920.00 | |
Less: taxes | $ 25,760.00 | $ 10,994.00 | $ 26,744.40 | $ 35,401.60 | ||
Profit after tax | $ 86,240.00 | $ 36,806.00 | $ 89,535.60 | $ 118,518.40 | ||
Add: depreciation | $ 107,000.00 | $ 171,200.00 | $ 102,720.00 | $ 61,632.00 | ||
Add: loss on sale | $ - | $ 3,448.00 | ||||
Working capital adjustment | $ (4,600.00) | $ (4,600.00) | $ (4,600.00) | $ 42,400.00 | ||
Add: sale proceeds | $ - | $ - | $ - | $ 89,000.00 | ||
Cash flow after tax | $ 188,640.00 | $ 203,406.00 | $ 187,655.60 | $ 314,998.40 | ||
d | Present value factor@ 15.0% | 0.869565217 | 0.756143667 | 0.657516232 | 0.571753246 | |
e=c*d | Present value of annual cashflows | $ 164,034.78 | $ 153,804.16 | $ 123,386.60 | $ 180,101.36 | |
Total present value of annual cash inflows | $ 621,326.90 | |||||
Less: investment | $ 535,000.00 | |||||
Working capital | $ 28,600.00 | |||||
NPV | $ 57,726.90 |
Answer is $55,000